Updates to the Bright-line Test – will I need to pay tax?
In our 2022 insight, we explored the changes to the bright-line test, impacting those that purchased and sold property within five or ten years.
However, from 1 July 2024, the National Government has reduced the bright-line test timeframe to two years. This drastic reduction impacts both first home buyers and investors.
What is the bright-line test?
The bright-line test seeks to tax the profit made by those in the business of buying and selling residential property.
If you buy and sell residential property within the relevant timeframe, any profit made on the sale will be taxed at your marginal income tax rate, unless you fall within one of the exemptions, as discussed below.
What is the bright-line test period?
The bright-line test period captures property purchased and sold within two years. The date you acquired the property is important to determine when the test begins and ends.
Start date
The start date for the bright-line test period is (for most residential properties) the official transfer date, i.e. the date of settlement.
End date
The bright-line test period ends when the agreement to sell the property becomes unconditional.
Exemptions
If you sell your property within the bright-line period but are also captured by an exemption, you will not need to pay tax on any profit made from your sale.
The bright-line test does not apply:
If you are selling your main home.
A property is your “main home” if this is the place you physically lived in during the majority of the bright-line test period.
If you used more than 50% of the property’s area as your main home or lived in the property as your main home for more than 50% of the bright-line period, this exclusion will apply. Therefore, you will not pay tax on any profit when you sell your house, regardless of how long you have owned it for.
To property received by you as part of a relationship property settlement.
To property that is acquired through inheritance from a deceased person’s estate property.
To property that is predominantly used as business premises.
To property that is being used as farmland or capable of being used as farmland.
If you are thinking of selling your property or wish to discuss how the bright-line test may impact you, please contact our property team on 03 379 3880.
